Robert M. Mooradian

Vulture Investors and the Market for Control of Distressed Firms

This paper investigates the role of external agents, known as vulture investors, in the governance and reorganization of a sample of 288 firms which default on their public debt. Vultures are frequently active on boards and in the management of target companies, and gain control of 16% of the sample firms, often through the purchase of senior claims. We find positive abnormal returns for the targets common stock and bonds in the two days surrounding the announcement of a vulture purchase of public debt or equity. Valuation effects are strongly dependent on the level of priority of the claim purchased, and are greater when the investor becomes CEO or Chairman or gains control of the target firm. We also find the improvement in post-restructuring operating performance relative to the pre-default level is positively related to the presence of a vulture investor in management of the target firm. The evidence suggests vulture investors add value by disciplining managers of distressed firms.

Commercial Real Estate Leasing, Asymmetric Information, and Monopolistic Competition

We model the choice of lease type, gross lease versus net lease, in an environment in which lessees have private information with respect to their expected intensity of utilization of the leased space, and in which lessors have market power with respect to the pricing of the lease. Unless the lessor can provide operating services at lower cost than the lessee, there exists a lemons problem. We examine a market in which lessors can provide operating services at lower cost. Given asymmetric information with respect to expected lessee utilization and/or damage to the leased space, the lessor offers both a gross and net lease, where the higher expected utilization lessees select the gross lease and the lower expected utilization lessees select a net lease. Lease pricing depends on both the lessors beliefs with respect to lessee utilization of the space and the lessors market power. In a monopolistic market, relative to a competitive market, a lessor charges higher rent for a gross lease relative to a net lease in order to extract a portion of the gain from shifting operating services to the lessor. Given the higher rent for a gross lease, a smaller proportion of lessees (only very high utilization lessees) selects a gross lease in a monopolistic market. Therefore, the expected cost savings associated with shifting operating services/provision of maintenance to the lessor are smallest in a monopolistic market. Copyright 2002 by the American Real Estate and Urban Economics Association.

Out-of-Court Restructurings and the Resolution of Financial Distress: Section 3(a)(9) Compared to Investment-Bank-Managed Exchange Offers

To avoid bankruptcy, financially distressed firms often undertake out-of-court restructurings, which take the form of exchange offers for firms with public debt outstanding. We examine the choice between potentially lower cost, faster offers of unregistered securities under Section 3(a)(9) of the Securities Act and investment-bank-managed exchange offers. We find that investment bank participation relates negatively to commercial bank debt outstanding but positively to bank loan concessions, firm size, number of debt contracts outstanding, and proposed debt reduction. Investment-bank-managed exchange offers result in greater debt reduction and better postrestructuring operating performance.

Cancellation Strategies in Commercial Real Estate Leasing

In a contractionary corporate environment, lease cancellation strategy becomes an important component of corporate real estate leasing decisions. This paper presents a leasing model in which less well-informed lessors offer leases with alternative lease cancellation options. The model demonstrates that a tenants choice of cancellation option reveals his private information with respect to the likelihood of option exercise. Tenants who select a lease with a downsizing option are more likely to exercise the option. Given the higher likelihood of option exercise, the model suggests that the downsizing option will be priced higher. We examine a sample of 311 leases, and consistent with the models prediction, we find that on average leases with a downsizing option have significantly higher contract rent. However, termination and sublet options are not associated with higher rent. The evidence suggests that market uncertainty, private information and adverse selection affect the pricing of alternative cancellation options and the choice of cancellation option. Copyright American Real Estate and Urban Economics Association.

Is Illiquidity a Risk Factor? A Critical Look at Commission Costs

A quarterly time series of the aggregate commission rate for NYSE trading over 1980-2003 allowed an investigation of the information conveyed by this liquidity risk metric and analysis of its critical role in the generation of stock returns. The aggregate commission rate was found to be highly correlated with other illiquidity metrics, such as the bid-ask spread. The rate is significantly and positively related to the excess returns of the stock market portfolio and has significant explanatory power for the cross-sectional variation in stock returns. An analysis of size-based portfolios indicates that returns become more sensitive to the aggregate commission rate with declining market capitalization.

Servicer Contracts and the Design of Mortgage-Backed Security Pools: Servicer Contracts and the Design of Mortgage-Backed Security Pools

We develop a unified model of mortgage and servicer contracts. Renegotiating mortgage contracts following default is strictly Pareto improving, if the lender gathers updated information. An incentive compatible servicer contract requires the servicer to hold a risk position that has a value strictly greater than the cost of exerting effort. This risk position cannot in general be approximated with a horizontal “first‐loss” position. An alternative, forming a nondiversified pool, preserves pool‐wide information, avoids the cost of an incentive compatible servicer contract, and may increase MBS value.

Servicer Contracts and the Design of Mortgage-Backed Security Pools

We develop a unified model of mortgage and servicer contracts. We show that renegotiating mortgage contracts following default is strictly Pareto improving, if the lender gathers updated borrower information. To align servicer incentives with investor interests, we demonstrate that servicers must hold risk positions in MBSs that include “vertical” components. However, offering incentive compatible contracts is not possible if foreclosure is highly inefficient and servicers do not sufficiently value investment in MBSs. In this case, forming a nondiversified pool to preserve pool-wide information may increase MBS value.